Bleak outlook ​

One of the ‘most challenging winter periods that the NHS has had, with demand rising significantly’ has had a ‘material impact on NHS finances’, according to NHS Improvement’s quarter three (Q3) report of the performance of the provider sector in 2017/18.

Providers reported a year-to-date deficit of £1,281m – £365m worse than the plan for this point in the year – and a £222m deterioration compared with the Q2 position. They also projected a year-end deficit of £931m. This is £435m worse than the planned year-end deficit and £308m worse than the Q2 forecast deficit.

Operationally, the regulator praised NHS providers. The 5.6 million people who visited accident and emergency departments over the October to December period represented an increase of a quarter of a million compared with the same period last year. And NHS Improvement confirmed this year as the ‘most significant flu season since the winter of 2010/11’.

Despite this record demand for services, providers kept the year-to-date A&E performance steady at a national level compared with the same three quarters last year. While performance remains below the required national standard, NHS Improvement said the NHS appeared to have stopped the year-on-year decline seen during recent years.

The increase in A&E footfall generated 400,000 emergency admissions in December – 5.9% more than in December 2016. And to boost capacity to deal with the  increased emergency demand, some trusts reduced planned elective activity, in line with the National Emergency Pressures Panel’s recommendation.

Despite this, at Q3 providers reported income £254m above plan, with a £366m overperformance on patient care income and a £112m underperformance on other income. This latter amount includes a £310m shortfall on the £879m planned income from the sustainability and transformation fund (STF) by this point.

Within patient care income, an increase in non-elective and A&E income of £294m above plan was almost exactly matched by shortfalls on non-elective and outpatient income.

Trusts received 70% of an additional £337m winter funding, announced in November’s Budget. Although this is included in forecast positions at Q3, NHS Improvement said the forecast income position had not increased by this value. It said this was due to trusts suspending non-urgent elective procedures in January to free up beds and clinical time to support non-elective care over winter.

NHS Improvement acknowledged that ‘expenditure tends to exceed income’ for higher-than-planned levels of emergency activity, while income typically exceeds expenditure for elective.

The Q3 figures appear to back this up. NHS Improvement said the net overspend was almost wholly attributable to the acute sector and was down to overspends on employee costs and non-pay costs of £701m and £292m. Part of the non-pay increase was linked to spending £144m more than planned on healthcare from non-NHS bodies. However, trusts were forecasting non-pay spending to end up just 1% higher than the levels in 2016/17. ‘In view of the inflationary pressures evident during 2017/18 [this] represents a significant achievement,’ it said.

With trusts employing 1.1 million whole-time equivalents, total pay costs for the first three quarters of the year were £38,923m – £701m over budget. The overspend was driven by medical staff (£460m or 4.9%) and nursing staff (£201m or 1.3%). Acute trusts’ overspending on staff increased by £373m in Q3. A significant overspend of £88m was also reported by the mental health sector.

Trusts expect to end the year £1bn overspent compared with their planned staff budgets. This means forecast staff spending has deteriorated by more than £500m since Q2. However, forecast pay expenditure is only 2.4% higher than in 2016/17. Given that pay inflation was assumed to be 2.1% in the tariff, this represents only a 0.3% real-terms growth, NHS Improvement said.

Temporary staff costs remain a challenge. Of the total £701m overspend on staff, £556m relates to overspent temporary staff budgets – made up of an overspend of £664m on bank staff and a £108m underspend on agency. This suggests providers are at least being successful in increasing the use of their own staff banks rather than the more expensive agencies.

Agency staff

NHS Improvement also pointed out that trusts’ spending on agency staff was £441m (20%) down on the same period last year. And despite the big overspend on bank staff, overall temporary staff costs were down £110m (2.7%) on the same period in 2016/17. The oversight body said there were clear signs that the controls on agency spending introduced over the past two years were facilitating a greater level of workforce planning and improving value for money.

Vacancies are a big factor in trusts’ need to source temporary staff and NHS Improvement is monitoring vacancy rates closely.

Medical vacancies have reduced steadily over the year, while nursing vacancies increased from Q1 to Q2 before falling in Q3. Overall for all staff, a 9% vacancy rate in Q1 (more than 102,000 WTE vacancies) has fallen to 8.4%

NHS trusts employ more than 313,000 WTE substantive nursing staff, leaving more than 35,000 vacancies. Some 90%-95% of these vacancies are currently filled by a combination of bank and agency staff.

Providers do not expect to see the annual costs associated with blocked capacity fall significantly (with year-to-date costs just £5m down). This is despite an extra £1bn government funding for social care, some of which was to be used to reduce the volume of delayed transfers of care and free up hospital beds.

However, NHS Improvement said activity recorded over the past three months suggests progress is being made. ‘This is vitally important,’ it said, ‘as the delivery of financial plans depends on achieving a number of key assumptions around risk management, agreed activity levels and the availability of beds.’

Cost improvement programmes (CIPs) have reduced total operating costs by £2.14bn (3.3%) – although this is £329m (13%) behind plan.

Pay cost savings are the biggest contributor to this shortfall, at £313m. Trusts expect this pay CIP gap to widen to £428m by the year end.

The oversight body also raised concerns about the continuing reliance on non-recurrent CIPs to compensate at least partly for underperformance on recurrent CIPs. While 92% of savings at this point in the year were planned to be recurrent, the actual level was just 74%.

Current forecasts suggest providers will miss their full-year savings target of £3.7bn by £392m. Even to achieve the current forecast saving outturn, trusts need to identify schemes to deliver a further £86m. There is still significant work to be done, with just 65% of the revised forecast efficiencies achieved in the first nine months.

However, trusts were at a similar point last year, offering evidence that trusts can increase delivery in the final quarter.

Rising efficiencies

While providers remain off-target on efficiencies, their combined savings in the first three quarters are nearly £100m up on the same period last year – a 4.7% increase.

NHS Improvement has made an early calculation of the productivity of the provider sector – putting it at 1.8%. This is equivalent to productivity in 2016/17 and means the sector continues to outperform the wider economy.

The difference between efficiency savings achieved in CIPs (3.3%) and the calculated productivity is explained by the number of one-off savings initiatives in CIPs and because providers are funding investments in quality through efficiencies – these investments are not measured in cost-weighted activity.

The worsening financial position provoked further calls for a more realistic view on the level of savings services can be expected to deliver and greater recognition of levels of rising demand (see box).

With providers still facing a 4% efficiency requirement for next year, even with additional funds announced in the Budget and planning guidance (see A fresh approach), there seems no let-up on the efficiency ask. But there are signs of greater recognition of the unrelenting demand on all services.

Announcing the Q3 report, NHS Improvement chief executive Ian Dalton praised NHS staff for their continued hard work and acknowledged there is more hard work ahead.

‘It would be unrealistic to assume the demand which has been building for a number of years is going to reverse,’ he said. ‘Local health systems need to work together to plan for capacity in future years that can meet the increasing levels of demand that we will continue to see.’